Question

PROBLEM 1 A recent accounting graduate from Marvel State University evaluated the operating performance of Fanning Company's four divisions. The following presentation was made to Fanning's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60,000. (See analysis below.) Other Three Divisions Total Sales $2,000,000 $480,000 Southern Division $2,480,000 400,000 Cost of Goods Sold 950,000 1,350,000 Gross Profit 1,050,000 80,000 1,130,000 800,000 140,000 Operating Expenses 940,000 S 190,000 S(60.000) Net Income 250,000 For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Southern Division is 35% fixed, and its operating expenses are 65% fixed. If the division is eliminated, only $25,000 of the fixed operating costs will be eliminated Instructions Do you concur with the recommendation? Present a schedule to support your new accountant's answer

Answer 1

Answer-1:

SCHEDULE OF NET INCOME WHEN ONLY OTHER DIVISIONS ARE IN RUN Other three divisions 20,00,000 Sales Variable cost: Cost of goods sold Operating expense Total variable cost Contribution Fixed cost: Cost of goods sold Operating expense [240,000+(91,000-25,000)] Total fixed cost Net income 7,60,000 5,60,000 13,20,000 6,80,000 1,90,000 3,06,000 4,96,000 1,84,000

Comment: It can be seen that there is a reduction of $6,000 (i.e. $190,000 - $184,000) when southern division is eliminated. This has happened because of incurring fixed cost even if the southern division is closed.

Hence it is not feasible to implement the accountant's suggestion.

Working Note-

SCHEDULE OF NET INCOME WHEN BOTH DIVISION ARE IN RUN Other three Southern divisions division Total $20,00,000 $4,80,000 $ 24,80,000 Sales Variable cost: Cost of goods sold Operating expense Total variable cost Contribution Fixed cost: Cost of goods sold Operating expense Total fixed cost Net income 7,60,000 5,60,000 13,20,000 6,80,000 2,60,000 $ 10,20,000 49,000 $ 6,09,000 3,09,000 $ 16,29,000 1,71,000$ 8,51,000 1,90,000 2,40,000 4,30,000 2,50,000 1,40,000 $ 3,30,000 91,000 $ 3,31,000 2,31,000 $ 6,61,000 (60,000) 1,90,000

Answer-2(a):

Sell 45 INCREMENTAL ANALYSIS SCHEDULE Net income Process increase further (decrease) Sales price 450 $ 495$ Direct material Direct labour Variable overhead Fixed overhead Total manufacturing cost 290 Net income 160 23

Answer-2(b):

Speedy Bikes should process further the unassembled bikes, as there is incremental net income of $23 per bike.

Answer-3:

INCREMENTAL ANALYSIS SCHEDULE Make Buy Net income increase (decrease) $ 17 Purchase price Direct material Direct labour Variable overhead Fixed overhead Total

Comment: Agler should buy the subassemblyies, as there is incremental net income of $7 per unit.